Revenue Recognition Accounting for Software as a Service ... · SaaS Presentation Outline •...

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Revenue Recognition Accounting for Revenue Recognition Accounting for Software as a Service (SaaS)Software as a Service (SaaS)

An Executive Webcast WithAn Executive Webcast With Jeffrey WernerJeffrey Werner

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Welcome to Today’s Event

• Viewing tips & CPE credit information

• About the webcast sponsor, Tensoft

• Introduction to today’s speaker

• Presentation: “Revenue Recognition Accounting for Software as a Service (SaaS)”

• Q & A


Viewing Tips & CPE Credit

• For “Full Screen,” go to “View” on the Control Panel

• Submit questions any time using the “Question and Answer” pane

• CPE certificates will be emailed to everyone who requested them during registration –please allow 1 week

• Recording and slides will be available in the Tensoft Resource Center in 24 hours


End-to-End Business Software Solutions

For the Technology Industry


Who is Tensoft?

Tensoft, Inc.

• Business software solutions provider

• Focus on technology companies

• Software for revenue management (RCM)

Tensoft RCM Product Line

• Complete revenue management suite

• Billing management for contracts

• Business model transaction flow support

• Visibility, Productivity, Compliance


Tensoft RCM Revenue Management

Sales Transaction

• Generated based on Go-To-Market Model

• Generated from website, ERP, Tensoft RCM Contract

Revenue Basis

• Determination of policy for document type

• Revenue base determination

• Sales Transaction Based

• SOP 97.2 based – residual method

• EITF 08-01 based – relative value method

• Revenue rules, sub-ledger, and analysis


Tensoft RCM Revenue Management


TodayToday’’s Presenter:s Presenter:

Jeffrey Werner, Jeffrey Werner,

Werner Consulting GroupWerner Consulting Group


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SaaS Presentation Outline

• Introduction

• SaaS Business Model

• Four Revenue Recognition Principles

• SaaS Accounting

– When SaaS is Software

– When SaaS is Service

• Set Up Fees and Related Costs

• Consulting and Training Services

• Fees based on Usage


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Introduction to Werner Consulting Group

Revenue Recognition Services Include: • Pre-Contract Negotiations and Deal Structuring• Post-Contract Review, Analysis and Accounting• Best Practices Implementation• VSOE Studies and Analysis• Customized Training Classes• Revenue Recognition Technical Research and Whitepapers• Revenue Recognition Policy Implementation and Improvement• Peak Demand Contract Review• Revenue Management Outsourcing• Audit Assistance• Revenue Management Software Implementation• EITF 08-1 Implementations


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Upcoming Events

Software Revenue Recognition Webcast

Thursday May 19 Part One

9 am – 12:30 pm PDT

Wednesday May 25 Part Two

9 am – 12:30 pm PDT

CPE Credit

Pay per attendance

Registration and details soon


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Software Revenue Recognition Class

Software Revenue Recognition Agenda,

Day One:

– General Principles of Revenue Recognition

– Multiple Element Arrangements

– VSOE

– License, Support and Services Issues


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Day Two:

– Introduction and Agenda

– Review - General Principles

– Services Contract Accounting

– Software as a Service (Saas)

– EITF 08-1 and 09-3

– FASB IASB Revenue Project


Questions / Slides

• Submit questions any time using the “Question and Answer” pane

• Submit questions after the webcast to Jeffrey Werner [email protected]

• Questions and responses by email and on Tensoft Blog

• Slides will be available to download after the presentation


SaaSSaaS Business ModelBusiness Model

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SaaS Business Model

History of Software Licensing

Time Share Model – the mainframe era

Perpetual Licensing – mini and PC era

License Fees

Support Fees

Implementation Fees

High cost of ownership – up front

Long Time to Implement – customization

Term Licensing – EDA Industry Model

Spread Costs over Periods of Use


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SaaS Business Model

Software as a Service - SaaSEvolution of the Internet

Service vs ownership

SalesForce.com

Industry Leader

Made SaaS Acceptable


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SaaS Business Model

Software as a Service – SaaS

Customer Advantages

Easy to implement – ready to go, standard set-up

Low upfront cost

Cost over time – pay as you go

Vendor keeps it running – lower internal IT costs

Less administration of licenses – how many to buy

Automatic updates

Easy access over the internet – browser interface

Network based rather than PC based


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SaaS Business Model


Vendor Advantages

Easier Sale – Lower Upfront Cost of Ownership

Predictable Ratable Revenue

Easy To Upgrade and Change Features

Customers Locked in to Usage – hard to change to another Vendor


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SaaS Business Model


Customer Disadvantages

Mission Critical Resource in Control of Vendor

Data in Control of Vendor – Privacy Concerns

Uptime dependent on Vendor and Internet

Vendor Disadvantages

No One Time Large Sales Revenue

Must have customer service focus


Revenue RecognitionRevenue Recognition

General PrinciplesGeneral Principles

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General Principles of Revenue Recognition

• Persuasive Evidence of an arrangement exists

• Delivery has occurred

• The fee is fixed and determinable

• Collectability is probable


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General Principles of Revenue Recognition

Easy Memory Device - Not ABC – CDEF

• C – Collection

• D – Delivery

• E – Evidence

• F – Fixed


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Revenue Recognition Literature

Revenue Recognition Literature

– SOP 97-2 and 98-9

– SAB 101 and 104

– TPAs (AICPA Technical Practice Aids)

– EITFs – 00-3, 00-21, 03-5

– EITFs 08-1 and 09-3

– FASB / IFRS Revenue Recognition Project


SaaSSaaS AccountingAccounting

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SaaS Accounting

Is it Software or Service?

SoftwareTake possession – on customer server or right to take

possession from vendor without significant costs

Customer has the ability to use independent of vendor

Perpetual and Term right of use

Right and Ability to use without vendor

License Fees and Support Fees

Upgrades – part of maintenance or upgrade fees

Data at customer


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SaaS Accounting

Is it Software or Service?

ServiceHosted by Vendor

Monthly or Usage Fees

Data on Vendor Server

Data Transition or Conversion Rights at End of Use

Right to Use only

Significant additional cost to take possession


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SaaS Accounting

SoftwareUse SOP 97-2 Accounting

VSOE for Undelivered elements

Typically Recognize License on delivery

Support Recognized over period

Service

Use EITF -8-1 Accounting

Generally ratable over subscription period


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Accounting for Elements of an Arrangement

Two Step Process

1 – Separation

2 – Allocation


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Separation of the Elements– Individual elements are independent

• Functionally – one is not essential to the other

• Contractually – payments not linked or contingent

• No related refunds or rights of return

– Individual elements have stand alone value

• Sold separately by any vendor

• Have resell value

– If can’t be separated, treat as one unit of accounting


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Allocation of Revenue to the Elements

– Software revenue recognition uses the Residual Method

– Service revenue recognition uses ETIF 08-1 Relative Selling Method


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Residual Method

– Defer the full value of undelivered elements using Vendor Specific Objective Evidence (VSOE)

– Allocate the remaining value or residual to the delivered elements


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Relative Selling Price Method

– Allocate to each element based each element percentage of total (relative value)

– Value is based on VSOE, TPE or ESP

– Defer revenue for undelivered elements

– Recognize revenue for delivered elements


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Accounting for Elements of a SaaSArrangement

SaaS –Multiple Element Arrangements

Subscription Fees

Set-up Fees

Consulting

Training

Usage Fees


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Accounting for Elements of a SaaSArrangement

SaaS – Multiple Element Arrangements

Is there Stand-Alone Value?

Often in SaaS the elements do not have stand alone value

Stand-alone value includes items sold separately by another vendor


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Up-Front Fees

SaaS – Up-Front Services (Set-Up Fees)– Up-front services are a necessary and inseparable

part of obtaining the services

– Up-front services have little or no value without the ongoing services

– Customer cannot buy the up-front services from another vendor


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Up-Front Fees

Revenue from up-front services should be accounted for either:

– over the initial contract period for services

– over the expected customer relationship period if greater than the contract period if the customer will benefit from the up-front services after renewal


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Up-Front Fees and Costs

Costs that are incremental and directly related to up-front services should be accounted for either:

– Expensed as incurred, or

– Deferred and charged to expense proportionally over the over the same period as the related revenue

The accounting is an option of the vendor and should be applied consistently


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Multiple contracts or one arrangement?

TPA 39 Attributes than indicate contracts are independent or related


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Issues to Consider – Multiple Contracts

• “TPA 39” Contracts - Multiple transactions with a Customer in a short time period

– Can be considered one contract for accounting

– An element without VSOE in one contract can effect other contracts with same customer

– All related contracts must be complete and signed for any revenue to be recognized

– Services SOW referenced or negotiated or being negotiated within the similar timeframe as the license could be considered a related contract

– All related contracts must be executed for any to be valid


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Issues to Consider – Multiple Contracts

• Indicators That Contracts Are Related:– The contracts or agreements are negotiated or executed within a

short timeframe of each other. – Contracts are executed by the same person.

– The different elements are closely interrelated or interdependent in terms of design, technology, or function.

– The fee for one or more contracts or agreements is subject to refund or forfeiture or other concession if another contract is not completed satisfactorily.

– One or more elements in one contract or agreement are essential to the functionality of an element in another contract.

– Payment terms under one contract or agreement coincide with performance criteria of another contract or agreement.

– The negotiations are conducted jointly with two or more parts ofthe customer’s organization (for example, from different divisions of the same company) to do what in essence is a single project.


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Usage Fees Revenue Recognized When Usage occurs

Service Meter approach – like the electric bill


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Example # 1 – Old Accounting under 00-21Vendor sells online service

$12,000 one year contract

$1,000 monthly service fee - one year contract

Renewable in year two for $1,000

$5,000 set-up fees – expected life 3 years


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Example # 1 – EITF 00-21 Accounting

Residual Method based on VSOE

NO LONGER USED$1,000 monthly service fee - VSOE

$5,000 set-up fees – delivered

Defer monthly fee at VSOE

Recognize service fee $1,000 monthly

Recognize set-up fees $139 monthly ($5,000 / 36)


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Example # 2 – EITF 08-1 Accounting


$12,000 ($1,000 monthly service fee – VSOE)

$ 5,000 set-up fees – delivered

$17,000 Total Transaction fee

Allocate using relative selling price

VSOE for monthly service

BESP for set-up fees

Calculate relative selling prices


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Example # 2 –


$12,000 service fees – VSOE – 60%

$ 8,000 set-up fees – BESP – 40%

$20,000

$10,200 service fees at 60% - $850 month

$ 6,800 set-up fees at 40% - $189 month ($6,800 / 36)

$17,000 total arrangement fee


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Comparison

Example # 1 Residual Method - No Longer Used

Year one

$12,000 Monthly Fee

$ 1,667 1/3 set up fee ($5,000 / 3)

$13,667

Example # 2 Relative Selling Price Method

Year one

$10,200 Monthly Fee

$ 2,267 1/3 set up fee ($6,800 / 3)

$12,467


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Example # 3

Vendor sells online service

$12,000 $1,000 monthly service fee - one year contract

Renewable in year two for $12,000

$10,000 Training - $2,000 day VSOE

$22,000 Total Transaction Fee

Does the Training have a separate value from the monthly service?


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Example # 3 – EITF 00-21 & 08-1 Accounting

$ 1,000 monthly service fee - VSOE

$10,000 Consulting / Training

Defer monthly fee at VSOE

Recognize service fee $1,000 monthly

Recognize Training when completed (assuming Training has separate stand-alone value)


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Example # 4 –

Customization Services$100,000 Annual Subscription Fee

renewable for year 2 $100,000 (VSOE)

$ 50,000 Customization Services

Do the customization services have stand-alone value?


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SaaS – Example # 4 – Customization ServicesThe customization services have no stand-alone value

because the customer only obtains value from the services through the use of the subscription services

Therefore the hosted services and the customization services should be treated as a single unit of accounting

Recognize revenue $150,000 revenue ratably over one year subscription period ($12,500 month)

Capitalize and expense customization costs or expense as incurred depending on company policy election


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Conclusion

Revenue Recognition Resources

• Big Four Revenue Recognition Guides

• Big Four Revenue Recognition Whitepapers

• AICPA

• FASB / EITF

• SEC Filings

• Webcasts

• Web Searches


Q & A

To submit a question now, please click on “Question and Answer.”

Then just type your question in the space under “Enter a Question”


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Additional questions or comments?

Please contact:

Jeffrey Werner

Email [email protected]

Werner Consulting Group

Revenue Recognition Consultant


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Upcoming Events

Software Revenue Recognition Webcast

Thursday May 19 Part One

9 am – 12:30 pm PDT

Wednesday May 25 Part Two

9 am – 12:30 pm PDT

CPE Credit

Pay per attendance

Registration and details soon


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Day One:

– General Principles of Revenue Recognition

– Multiple Element Arrangements

– VSOE

– License, Support and Services Issues


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Day Two:

– Introduction and Agenda

– Review - General Principles

– Services Contract Accounting

– Software as a Service (Saas)

– EITF 08-1 and 09-3

– FASB IASB Revenue Project


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Conclusion

Werner Consulting GroupRevenue Recognition Services Include:

• Pre-Contract Negotiations and Deal Structuring

• Post-Contract Review, Analysis and Accounting

• Best Practices Implementation

• VSOE Studies and Analysis

• Customized Training Classes

• Revenue Recognition Technical Research and Whitepapers

• Revenue Recognition Policy Implementation and Improvement

• Peak Demand Contract Review

• Revenue Management Outsourcing

• Audit Assistance

• Revenue Management Software Implementations

• EITF 08-1 Implementations

Revenue Recognition Accounting for Revenue Recognition Accounting for Software as a Service (Software as a Service (SaaSSaaS))

WebcastWebcast

March 9, 2011March 9, 2011

Thanks for Joining Us TodayThanks for Joining Us Today

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Revenue Recognition Accounting for Software as a Service ... · SaaS Presentation Outline •...

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